FINRA Press Release: Improper Marketing

it has ordered Charles Schwab &
Company, Inc., to pay $18 million into a Fair Fund to be established by the
Securities and Exchange Commission (SEC) to repay investors in YieldPlus, an
ultra short-term bond fund managed by Schwab's affiliate, Charles Schwab
Investment Management. The $18 million consists of the $17.5 million in fees
that Schwab collected for sales of the fund, plus a fine of $500,000, both of
which will have been designated as restitution to customers.

From
June 2007 through June 2008, the total return on Schwab’s YieldPlus fund (SWYPX and SWYSX) was -31.7% when other ultra short
bond funds had little or no losses.
These large losses occurred because Schwab’s YieldPlus fund was not an
ultra short bond fund as claimed by Schwab.
It was instead an ultra long
bond fund.

YieldPlus
held large amounts of securities backed by illiquid, long-term, private label
mortgages. It also held long maturity corporate bonds and trust preferred
securities. In doing so, Schwab’s fund
violated concentration and illiquidity limits stated in its prospectus and had
much more credit and liquidity risk than it disclosed in its SEC filings and
marketing materials. YieldPlus’ long term securities including private label
mortgage backed securities gave it a slight advantage over its peers prior to
2007. Unfortunately, the extra yield was
an order of magnitude smaller than the losses that followed when credit and
liquidity spreads widened and the value of its long term holdings dropped
significantly in 2007 and 2008.

YieldPlus’s
heaviest reported losses occurred in early 2008, yet Schwab still appears to
have understated these losses by significantly inflating the value of the
fund’s holdings and therefore its net asset value (NAV).

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